Regulation and tradeoffs

Objective: Explain regulation and market failure, distinguish their meanings, and apply them to a described case.

Regulation: Regulation establishes enforceable rules governing specified activities. Market failure: Market failure describes conditions where unregulated allocation falls short of a specified efficiency benchmark. Public policy changes incentives, resources, and constraints. Effects depend on institutional design, economic conditions, behavioral responses, and timing. A tax's legal payer need not bear its entire economic burden. Deficits are flows during a period, while debt is a stock at a date. Evaluation needs a credible alternative path, attention to implementation, and disclosure of distributional effects and uncertainty. Application: A rule requires disclosure of product risks. This most directly illustrates regulation. External costs are omitted from private decisions. This most directly illustrates market failure.

Objective: Explain compliance cost and enforcement, distinguish their meanings, and apply them to a described case.

Compliance cost: Compliance costs are resources used to meet regulatory requirements. Enforcement: Enforcement monitors and applies rules through authorized procedures. Public policy changes incentives, resources, and constraints. Effects depend on institutional design, economic conditions, behavioral responses, and timing. A tax's legal payer need not bear its entire economic burden. Deficits are flows during a period, while debt is a stock at a date. Evaluation needs a credible alternative path, attention to implementation, and disclosure of distributional effects and uncertainty. Application: A firm installs equipment to satisfy a standard. This most directly illustrates compliance cost. An agency checks whether a required disclosure is accurate. This most directly illustrates enforcement.

Objective: Explain regulatory capture and policy evaluation, distinguish their meanings, and apply them to a described case.

Regulatory capture: Capture occurs when regulated interests unduly influence a regulator's decisions. Policy evaluation: Evaluation compares outcomes and alternatives with attention to causality and distribution. Public policy changes incentives, resources, and constraints. Effects depend on institutional design, economic conditions, behavioral responses, and timing. A tax's legal payer need not bear its entire economic burden. Deficits are flows during a period, while debt is a stock at a date. Evaluation needs a credible alternative path, attention to implementation, and disclosure of distributional effects and uncertainty. Application: A rule-making process favors incumbent firms over the stated public purpose. This most directly illustrates regulatory capture. An analyst compares measured effects with a credible baseline. This most directly illustrates policy evaluation.